Educating Rico: The fine print
Rico's credit card agreement. Six oversized, double-sided pages of indecipherable language, all in nine-point font.
TEXT OF STORY
KAI RYSSDAL: So the big feast is over. Lemme hazard a guess as to what you've been doing since the big day: Shopping? How'd I know?! Mobs of Americans invaded retailers to kick off holiday shopping season this week. Soon the gifts they bought will be opened along with envelopes containing special gifts from credit card companies, the bills for at that shwag. If you're not careful, those bills could contain some nasty surprises. As Associate Producer Rico Gagliano learns in this episode of our series Educating Rico.
RICO GAGLIANO: Hi, I'm Rico. And I'm a chump.
At least, that's how credit card companies apparently think of me, a fact made clear the other day.
I'd received a notice from one of my cards. Some changes were being made to my credit agreement. The document was six double-legal-sized pages long, filled top to bottom with nine-point font. In the midst of which I noticed this:
"In the future, if your account is late or your balance exceeds your credit limit, we may increase any of the non-promotional APRs on your account, without further notice, up to the Default Rate."
Allow me to translate. I have, on the card, what's called a default rate. If I'm late making a payment they can jump me from my low interest rate to the default: 24% or so. And what this new provision says is they can now slap me with that obscene rate without any advance warning. Ah! But there's a kicker:
"You may reject this change!"
That's right. All I have to do is send a letter, and in the future, as in the present, they'll have to actually tell me if they plan on hitting me with that default rate. Now, what sane human being wouldn't reject this change? I mean, let's reverse the situation. Would anyone call their credit company and have this conversation?
CUSTOMER SERVICE: Hello, customer service guy.
GAGLIANO: Yeah, hi. If you hike my interest rate, I would like to have less notification.
CUSTOMER SERVICE: Less?
GAGLIANO: Yeah. Like . . . none.
CUSTOMER SERVICE: Uhm, are you sure? It seems like you'd want some warning . . .
GAGLIANO: Nope, keep me in the dark. I like big, costly surprises!
CUSTOMER SERVICE: All right. We can now raise your rates surreptitiously at our leisure.
GAGLIANO: Sweet! Now I'm gonna stab forks into my eyes!
My point being: Of course no one would choose this card provision. So my company made the change anyway, buried it in fine print, and hoped customers wouldn't notice we had a choice in the matter. It got me thinking -- what other hidden credit loopholes and fees are lurking out there? To shine a light into the dark corners of card agreements, I've called upon Marlys Harris. She's the editor of the Consumer Reports magazine "Money Advisor."
GAGLIANO: Hi, Marlys. So is it just me or are all these various rules and fees and changes getting harder to figure out?
MARLYS HARRIS: Well I think they are because we got one and I'll just read you a little bit, I brought it with me:
"We are changing the grace period so that when you pay the prior new balance by the payment date due, finance charges will be assessed on purchases during the current billing period until the date that full payment of the prior new balance was received."
Do you understand that?
MARLYS HARRIS: I'm sure you . . . anyway, I didn't get it so I decided to call two experienced consumer lawyers and they thought it was something called double-cycle billing. But then I found that there was another expert at the Federal Reserve in Philadelphia. He said, 'oh no, that's something called residual interest.'
GAGLIANO: Of course, residual interest.
HARRIS: Yeah of course!
GAGLIANO: So obviously the language can be pretty impenetrable, but we still gotta give people some idea what to be aware of when they're paging through this stuff so let's start with the most obvious thing which would be interest rates. I've got credit cards that are all fixed rates. As long as I'm paying those off on time they can't change the rates on me, right?
HARRIS: Well it's not "fixed." For example the offer I'm looking at in the footnotes says, "Rates, fees and terms may change. We can change the APR at any time for any reason."
GAGLIANO: They're not required by law to inform you way ahead of time that your offer is changing?
HARRIS: If it calls itself fixed, they have to notify you within 30 days in advance, but if they specify that they can change at any time they don't have to.
GAGLIANO: What about the time that you have to pay up?
HARRIS: That's called the grace period and they're shrinking. They used to be 25 days, that's about the best you can get now but now they're shrinking to about 20 days.
GAGLIANO: That's on average?
HARRIS: Yes. We've received a lot of complaints from consumers that their bill seems to be arriving much later so that they have less time to make sure that it's paid on time and credit card companies have become very strict about when they want your bill in. They used to waive a late fee if you were a day late or something. Now they want it in usually by 10 a.m. of the particular day they've specified.
GAGLIANO: Are there any of these fees that you can sort of see coming down the pike that maybe aren't being used a whole lot but often catch people by surprise?
HARRIS: Well my favorite is the inactivity fee. If you don't use your card for six months then they charge you, say, $15.
GAGLIANO: For being a good boy -- or girl?
HARRIS: Well for carrying the card around in your wallet. And I don't see them on many cards but I'm sure that's going to be full-blown in the next year or so. Then there's something called the Universal Default Rate. If you are late on this credit card bill -- or any other credit card bill -- your rate goes up to the highest possible…
GAGLIANO: That's if you're late on a completely different card? What's the rate?
HARRIS: On this particular offer it's 23.99% plus the Prime rate. That's about what Tony Soprano would charge if he were running this company I'm sure.
GAGLIANO: What can we do about all this? I mean can I just call my card and say hey, cut it out I don't want you to do that anymore?
HARRIS: Well you do have some power because it costs credit card companies say about $200 to acquire a new customer. They'd much rather keep you as a customer, so you should call in if you get a rate hike and say 'I'm very depressed you did, I'm distressed.' Chances are they'll cut it back. If they don't what you can do it close that account and then you will be allowed to pay off your purchases at the old rate.
GAGLIANO: Of course the key is knowing they're changing the rules on you in the first place. Marlys Harris of Consumer Reports, thank you for talking to me.
And a word of advice: As far as credit companies are concerned, we're all suckers-in-waiting. Call them and find out if you're already subject to these fees and conditions. Check our website for examples of others you should look out for. And if they send you a new agreement? Read the fine print.
In Los Angeles, I'm Rico Gagliano for Marketplace Money.